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EU Emissions Trading System Directive amended - what’s next?

The revised EU ETS Directive amending Directive 2003/87/EC establishing the EU ETS and implementing the fourth trading period (2021-2030) came into force on 8 April 2018. The Directive introduces significant changes to EU ETS but also sets a framework for further EU legislation.

The revised directive provides for a faster annual decrease of the EU cap on emission allowances. It will be reduced each year by a linear factor of 2.2%, compared to the current linear factor of 1.74%. This aims to contribute to the EU’s 2030 target to reduce the Union’s overall greenhouse gas emissions to at least 40% below 1990 levels by 2030. The directive will be reviewed in accordance with international developments and the objectives of the Paris Agreement. The measures to support certain energy-intensive industries will also be reviewed in the light of climate policy measures in other major economies.

Some amendments will affect the Market Stability Reserve (MSR), by doubling the number of allowances that are removed from the market and placed in the reserve until 2023. Moreover, the revised directive stipulates that allowances held in the reserve exceeding the total number of allowances auctioned during the previous year will no longer be valid.

Under the revised directive, auctioning will remain the general method for allocating emission allowances, with free allocation as the exception. Over the entire fourth trading period (2013-2020) 57% of allowances will be auctioned, while the remaining 43% of allowances are available for free allocation. The share of allowances to be auctioned may be reduced by up to 3% of the total quantity of allowances. The level of free allocation for installations will follow their actual production levels. To that end, free allocations may be annually updated to reflect relevant increases and decreases in production.

Sectors and sub-sectors deemed to be exposed to the risk of carbon leakage will continue to receive free emission allowances. However, the amended allocation system focuses on energy-intensive industries at the highest risk of carbon leakage. Such sectors will receive allowances free of charge until 2030 at 100% of the quantity determined pursuant to the revised directive. Sectors deemed to be at a lower risk of carbon leakage will obtain free allowances at 30% of the overall quantity. Unless otherwise decided, free allocations to those sectors, except district heating, will decrease by equal amounts after 2026, in order to definitively discontinue free allocation in 2030. Under the revised directive, Member States may also continue to grant operational aid to sectors or subsectors which are exposed to the risk of carbon leakage (i.e. due to significant indirect costs that are incurred from emission costs passed on in electricity prices). However, such financial measures must be in line with state aid rules, and in particular may not distort competition in the internal market.

The directive provides for financial resources to support the modernisation of energy systems in certain EU states and innovation in the energy industry – the Modernisation Fund and the Innovation Fund. The Modernisation Fund is established for the period from 2021 to 2030 to finance investments aimed at modernising energy systems and improving energy efficiency in certain member states (i.e. those with a GDP per capita at market prices below 60% of the Union average in 2013). However, supported investments should be consistent with the EU’s climate policy. Energy generation facilities using solid fossil fuels are not eligible to receive support from the Fund (with some minor exceptions). The Innovation Fund aims at supporting low-carbon technologies and processes, including carbon capture and utilisation (CCU), capture and geological storage (CCS) of CO2, as well as innovative renewable energy and energy storage. The respective funds are available to investments from all member states, including small-scale projects.

Member States are required to transpose the revised directive into national law by 9 October 2019. Moreover, further EU legislation concerning EU ETS is expected. Under the revised EU ETS Directive, the European Commission is empowered to adopt delegated acts concerning the general rules for the allocation of allowances as well as the determination of sectors and subsectors deemed at risk of carbon leakage (carbon leakage list). In addition, the Commission will adopt implementing acts concerning the revised benchmark values for free allocation and detailed arrangements concerning the monitoring and reporting of emissions. It may also adopt implementing acts establishing rules for adjusting free allowances to changes in production levels.

The European Commission has recently launched an initiative – a Roadmap aiming at the preparation of a delegated act concerning free allocation rules as well as an implementing act on adjustments in the level of free allowances due to changes in productions levels. The deadline for providing feedback on the Roadmap was 17 April 2018. Further, The Commission Notice on the preliminary carbon leakage list 2021-2030, concerning the sectors and subsectors exposed to the risk of carbon leakage, has officially been published on 8 May 2018. The list includes, inter alia, sectors related to mining, mineral extraction, manufacture of chemicals, manufacture of synthetic and textile products, manufacture of building materials and metals production. The preliminary list will be presented to and discussed with relevant stakeholders on 16 May 2018 in Brussels. Market participants, in particular entities from energy and energy-intensive industries, should closely follow the European Commission’s further steps regarding EU ETS.